Trend following does the one thing most people are emotionally unable to do: it buys things that are already rising and sells things that are already falling. The thesis is that real trends, once they get going, tend to keep going for longer than anyone expects.
The defining trait of the style is asymmetry. Trend followers lose small, often. They are constantly probing for the next trend, getting stopped out when it does not develop, and racking up a string of paper-cut losses. Then, occasionally, a real trend shows up. They ride it. The winner is several times the size of the typical loser. The math comes out positive in spite of a win rateWin RateThe percentage of closed positions that ended in profit over a given period.Click the word to learn more well below 50 percent.
The hard part is human, not technical. Sitting through a long string of small losses while waiting for the next runner is psychologically punishing. A lot of discretionary trend followers quit two positions before the one that would have paid for the whole year. An algorithm does not have that problem. It just keeps executing the rules.
Javlot trend-following strategies disclose the shape up front: win rate, average win, average lossLossThe realized loss on a closed position, or the sum of every losing position across a period.Click the word to learn more. The asymmetry is the feature, not a bug to be hidden.